Paranoid delusions they haunt you
Where's my friend I used to know?
He's all alone, he's buried deep within
A carcass searching for a soul
Why can't you believe
You can be loved?
I hear you scream in agony
-- "Wasted Time (adapted)", Bach, Bolan, Sabo (Skid Row) 1991
Tick, Tick, Tick...
The clock on the wall ticks its last. That's it. 11:38 a.m. Forever. Time presses on. Also forever.
Financial markets were referred to as dull on Wednesday. At least that's what I heard. That's what I saw. That's what I read. The words of others. I get it. Something to sell, pressed for precious time. Limited imagination. Pressure.
Truth. It is true that we have entered into the early part of what for us is the "off-season," the four times a year that we find ourselves in between the frantic release of quarterly results. We also find ourselves mired in the Fed's pre-decision "blackout period."
So, it is that we focus on the meme stocks. Hey, that's where the action is. Except on Wednesday, the meme stocks did not meme. Always (maybe not always) better to wait for a buy or sell signal prior to engaging in volatility unsupported by any underlying business. Oh, great fun. Unless the music stops.
What we are left with for the meme stocks if they don't play ball, is churn. What we are left with for large-caps as they scrape along neither breaking to the upside nor cracking for endless weeks it seems... is chop.
Among our most focused upon large-cap indices, the Nasdaq 100 was the only one that shaded green on Wednesday, closing virtually unchanged at +0.03%. The Dow Industrials, which has become an index very difficult to still refer to as a "major," took the largest hit, at -0.44%. Trading volumes remained elevated but that still has a lot to do with various meme stocks whether or not they dance to the beat.
There was something that bothered me on Wednesday, however. Let us go on.
What Is the Meaning of Marking Time?
To get your cover and alignment, Sir. Is that what financial markets were doing ahead of this (Thursday) morning's CPI report for May?
Wall Street consensus is for a headline print of 4.7% and for 3.4% at the core. The month-over-month data is far less important right now. Of course, we are lapping the pandemic shutdowns of Spring 2020, so these numbers are supposed to appear somewhat distorted. Be concerned, not frightened, my young friends.
Yet, equity traders piled out of small-to mid-caps on Wednesday. Profit-taking? Could be. The Russell 2000, S&P 400 & S&P 600 have been hotter than their larger-cap kin. That said, taking a look at those large-caps -- using S&P SPDR sector select ETFs for proxies -- traders drained the flow of capital out of cyclical types and postured themselves defensively on Wednesday. Industrials ( (XLI) ), Financials ( (XLF) ), and Materials ( (XLB) ) bled red, while Health Care ( (XLV) ), and Utilities ( (XLU) ) took on the pleasant aroma of freshly cut grass.
OK, OK, I do understand that weakness in Financials and strength in Utilities are byproducts of a collapsing yield curve, but that's the whole key here, don't you think? Bond market traders, Treasury debt market traders to be precise, are betting against the CPI this morning, as are those charged with allocating equities. The Treasury Department auctioned off $38 billion worth of 10-year paper on Wednesday.
Demand was excellent. Bid to cover and interest from indirect bidders (foreign accounts) reached levels not seen in almost a year. (Gee, I wonder who has been writing endlessly that foreign demand would be excellent for U.S. debt at these levels.)
Some folks seem to misunderstand that even at a yield of 1.49%, which might be a real yield of something like -3% here in the States, elsewhere (perhaps Japan), there are contracting economies, suffering not from disinflation, but deflation with their own sovereign 10-year paper paying just 0.05%.
Just where do you think these folks are going with any slice of dough allocated toward "safer" fixed income? They'll go where the nominal yield still provides a significantly positive real yield. Duh.
What that means is that the Fed can, regardless of whatever kind of inflation print hits the tape today, start to move away from outright money creation. We have talked until we have been blue in the face about halting all MBS purchases. That's just common sense, and the rest of Wall Street is starting (Do we have to tell these guys everything?) to catch on, but what good does the rest of this quantitative-easing program do? It really is just a safety blanket at this point.
There is already too much cash being stashed at the Fed overnight almost every night. Too much liquidity, almost all confined to the banking system. Not adding to nor detracting from anything remotely connected to any economic activity in your neighborhood nor mine. Needed to fund the federal government? Good point, but as I have just illustrated, at least for now, there are others willing to fund our federal government.
Should the Fed experiment with walking away from the longer end of our Treasury market (they can still pin the short end), how far would yields really fall at that deep end of the pool? Think about it. The risk could be spread out to a vastly larger group of investors, albeit at elevated borrowing costs. These buyers would be mostly foreign central banks. Let's find out where the honest price point is for these products. We really can be so much smarter than we are.
Would this kind of action disrupt equity markets? Well, considering the fact that everything is priced by keyword reading algorithms these days, yes, the headline risk would be short-term enormous. That said, humans will step in at the right level. You "can't be king of the world if you're slave to the grind." (also Skid Row).
I think ultimately we have two choices. We can either live in fear forever (I don't want to do that) or we can raise our shields, unsheath our mighty swift swords and turn to face the enemy.
Remember, fear is but for the wicked, and the wicked shall tremble when in our presence. Amen.
How long have we cried out in the wilderness with no one listening? How long have we practically begged regulators to pay attention? Finally, perhaps a champion has risen from the depths of what felt like eternal slumber.
I did not expect it, but my new hero is the new chair at the Securities and Exchange Commission. That new Chair, Gary Gensler, has asked his staff to make recommendations to update and amend market rules. This review is expected to cover the issue of payment for order flow, which has led to the current "zero-commission" (but hardly free) brokerage environment.
For years, we have cried out that free was anything but. That the retail investor was the product sold. At last, someone in a position of leadership appears to care.
I know I risk losing many friends on Wall Street by writing this. I both laugh and skoff as now they must fear as others already have, but I have always felt that payment for order flow skewed legitimate price discovery. For that matter, Mr. Gensler, if I may have your attention, I think you may be interested in taking a look at "dark pools" that serve only to blur anything resembling honest transparency in the marketplace, in other words... to deceive, as well as rebates paid by the exchanges themselves.
Heck, if I may push my luck just a little bit, maybe we could "un-fracture" the marketplace. How better to serve the function of free market price discovery than to force an ongoing two-sided auction at a centralized point of sale. You want exposure? You want representation? Do you want to buy or sell anything? Public auction is the only fair way. Anything else, in my opinion, means that somebody is hiding something.
You may not be able to return markets to open outcry (market participants now value time over price these days) but you can return fairness to those in the public who still value price over time. It's their money, it's their time.
... That the Biden administration has made plans to purchase 500 million doses of the Pfizer (PFE) / BioNTech (BNTX) COVID vaccine to donate to poorer nations. There is no lasting victory over COVID in an isolation that allows the virus to continue to mutate elsewhere.
Even if one feels that U.S. taxpayers should not have to contribute to vaccinating the rest of the world, this is in our best interests. I may not like doing this through Covax, which is backed by the WHO (World Health Organization) as, in my personal opinion, the WHO has little to no credibility left after what happened early on in this pandemic. Hopefully, they can at least do this right.
I Don't Like
... That United Parcel Service (UPS) reduced guidance by a full percentage point at their "investor day." That little slice of inflation-related information knocked both UPS and FedEx (FDX) for a loop on Wednesday. I had taken off a third of my UPS long in May when the stock hit my $212 price target, but I am still long the other two-thirds and I am long FDX as well.
I also did not like news about the Restaurant Brands (QSR) report dated in mid-May, reported at Bloomberg News yesterday, that the company "can see significant inflation across all regions on proteins and oils."I'm not long QSR, but I do like Whoppers and chicken sandwiches.
Now I can understand a fast food chain struggling with inflation, but I had gotten myself into delivery services as an inflation hedge figuring that the industry could command from a position of strength as prices increased. Color me not frightened, but at least concerned.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 369K, Last 385K.
08:30 - Continuing Claims (Weekly): Last 3.771M.
08:30 - CPI (May): Expecting 4.7% y/y, Last 4.2% y/y.
08:30 - Core CPI (May): Expecting 3.4% y/y, Last 3.0% y/y.
10:30 - Natural Gas Inventories (Weekly): Last +98B cf.
13:00 - Thirty Year Bond Auction: Last $24B.
14:00 - Federal Budget Statement (May): Last $-226B.
The Fed (All Times Eastern)
Fed Blackout Period.